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No Growth Engine?

by afew Wed Jan 16th, 2013 at 10:44:50 AM EST

Former FMI man Ashoka Mody asks on Project Syndicate if the European core is not cracking.

A Breach in the Eurozone Dike by Ashoka Mody - Project Syndicate

The third stage of the eurozone crisis will arrive when the economic strength of the core is in doubt. Those very doubts undermine the credibility of the safety net that has been supporting the European periphery.

A solution to the eurozone crisis that relies on Germany has always been politically uncertain. It may soon become economically untenable.

And cites poor growth prospects for Germany and the Netherlands.

A Breach in the Eurozone Dike by Ashoka Mody - Project Syndicate

The Bundesbank has lowered its forecast for German annual GDP growth in 2013 to 0.4%. The Central Bank of the Netherlands expects Dutch GDP to shrink by -0.5% this year – and to contract further in 2014.

He recalls that the FMI forecast considerably higher growth than that, but, as we all know since Olivier Blanchard and Daniel Leigh discovered the FMI had got the multipliers and therefore the growth forecasts wrong, FMI forecasts were as far out as usual. Reading the European Tribune over the past few years would have sufficed to understand that forced austerity in the service of monetarist policies would depress demand and produce recession, including in the core, including in Germany.


As Mody points out, German growth in 2010 was due to exceptional Chinese demand:

A Breach in the Eurozone Dike by Ashoka Mody - Project Syndicate
Europe does not have its own growth engine. The German rebound was initially robust because world trade rose rapidly after a precipitous fall. China’s voracious appetite for German cars and machines provided the needed boost, even as Germany’s traditional trade partners in Europe struggled.

Europe does not have its own growth engine. Not if it consists of a brilliant plan for all European economies to become ferociously export-oriented, no.

But what would the outlines of a European "sustainable" growth engine be?

Display:
Germany's export model faces reality check | Business | guardian.co.uk

Like Britain, Germany needs to rebalance its economy. But whereas the UK tends to live beyond its means, consuming and importing too much, Germany has the opposite problem. The sharp slowdown in 2012 growth shows just how vulnerable Europe's biggest economy is to events in the rest of the world.

After posting strong growth of 4.2% in 2010 and 3% in 2011, Germany came down to earth with a bump last year. National output expanded by 0.7%, and although Berlin has yet to publish data for the final three months of 2012 the government is pencilling in a fall in gross domestic product of around 0.5%.

Two key factors lie behind the current slowdown. Firstly, life has been a lot tougher in 2012 for German exports. The impressive recovery in 2010 was largely due to global demand for Germany's precision manufacturing goods, particularly the machine tools needed by the bigger developing countries for their industrialisation programmes. That demand cooled in 2012, with the uncertainty caused by the US fiscal cliff row further affecting export sales.

Secondly, the euro finally took its toll both on exports and investment. The sharp contractions in Greece, Spain and Portugal, together with budget cutbacks and slower growth in other eurozone member states, has not only fed through into weaker order books for German firms, it has also made them more cautious about spending money on new plant and machinery.

by Metatone (metatone [a|t] gmail (dot) com) on Wed Jan 16th, 2013 at 11:08:13 AM EST
If only there were a way of having a way of making exports and imports balance out somehow.


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sapere aude
by Number 6 on Wed Jan 16th, 2013 at 11:22:00 AM EST
[ Parent ]
Metatone:
just how vulnerable Europe's biggest economy is to events in the rest of the world.

And of course all the more so because Germany's export economy is based on depressed domestic demand.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Jan 16th, 2013 at 12:04:29 PM EST
[ Parent ]
It's mostly vulnerable to its own stupidity.

You cannot pretend to be a small open economy and not be sensitive to the rest of the world.

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS

by Migeru (migeru at eurotrib dot com) on Wed Jan 16th, 2013 at 12:23:10 PM EST
[ Parent ]
Part of the problem is that for the true believers, the storms that a small open economy suffers are a feature not a bug. They provide cleansing of the feckless (through starvation) and discipline for all.
by Metatone (metatone [a|t] gmail (dot) com) on Wed Jan 16th, 2013 at 12:51:59 PM EST
[ Parent ]
Paolo Manasse on VoxEU goes over similar ground (with many charts):

Eurozone crisis: It ain't over yet | vox

The Eurozone policy response to the crisis, fiscal tightening and reinforced constraints on Eurozone national borrowing to prevent moral hazard, is not only imparting a recessionary impact on the Eurozone, but it is also aggravating the `original sin' of the euro: asymmetry.

Thus, in a context of scarce international labour mobility and lack of wage and price flexibility in some Eurozone countries, the lack of an operative ex-post transfer/insurance scheme becomes even more serious.

The problem is a very difficult one. A centralised `ex-post' transfer scheme is necessary, but does not seem to be politically feasible. The adopted Macroeconomic Imbalances procedure, a mere `ex-ante' monitoring device - akin to a score board - for detecting `asymmetries' is probably counter-productive. Instead of transferring resources to countries suffering shocks, it punishes them.

The longer-term prospects for the survival of the euro not only are not improving, they are actually getting worse.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Jan 17th, 2013 at 02:21:16 AM EST
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Jan 17th, 2013 at 02:25:03 AM EST
[ Parent ]

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Jan 17th, 2013 at 02:27:00 AM EST
[ Parent ]
For them, the economy is a morality play.

More evidence of insanity:

Munchau on the SPD's misguided approach to tax evasion

In his Spiegel [column] Wolfgang Munchau criticises the SPD for its latest proposals to close down banks that help people avoid taxes. He says it is in principle a good idea to have instruments to close down and resolve banks, but the goal should be financial stability. A bank closure is not something a government should order for political reasons. And since the banks in question are usually large international banks, it will be a very hard thing to do. If the SPD really wanted an environment in which dubious banks can close down, then the best it can do is to support a pan-European bank resolution scheme.

(Eurointelligence, 17.01.2013)

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Thu Jan 17th, 2013 at 04:14:06 AM EST
[ Parent ]
Stubbornness in insanity, from Philip Rösler, German Finance Minister:

Germany rejects Rajoy request for stimulus measures | In English | EL PAÍS

German Economy Minister Philipp Rösler on Wednesday rejected calls for extraordinary measures to boost growth in Germany.

"There will be no stimulus packages financed by debt," Rösler told a news conference in Berlin. The minister attributed the crisis to "excessive indebtedness," which he said is being successfully remedied.

The leeches are working, the patient is dying.

(h/t Eurointelligence)

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Jan 17th, 2013 at 04:19:00 AM EST
[ Parent ]
Fortunately, Rössler won't  be around much longer.
by redstar on Thu Jan 17th, 2013 at 05:01:46 AM EST
[ Parent ]
Rössler is not special among German policymakers.

I distribute. You re-distribute. He gives your hard-earned money to lazy scroungers. -- JakeS
by Migeru (migeru at eurotrib dot com) on Thu Jan 17th, 2013 at 05:55:51 AM EST
[ Parent ]


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